1. That should be OK. Once you start experiencing some load on your service, you may want to explore pooled components/connections.
2. Why is your connection failing? That's for you to discover... I'm guessing you don't have the ODBC connectionstring parameters correct.
3. Don't put anything your service/app needs outside the folder that is the webroot. Your service will not have the authority to read from the C:/ drive. All references to files in the file system should be relative to the webroot. In other words, /myfiles/connection.ini will map to C:\inetpub\wwwroot\[your service name]\myfiles\connection.ini
4. Do not ever use visual feedback in a non-visual app. No messageboxes inside services. Write to a log file...